Wednesday, December 10, 2008

Crude oil rose as traders bought contracts to close out bets that prices will fall and on signs that OPEC will cut production twice in as many months.

OPEC, which pumps 40 percent of the world’s oil, may reduce its output limit by as much as 2.5 million barrels a day to reverse recent declines, billionaire hedge-fund manager Boone Pickens said yesterday. Traders who held short positions, or bets prices would fall, are purchasing futures after oil dropped more than 20 percent in the past two weeks.

“For short-term traders, for scalpers, that kind of drop is definitely a buy signal,” said Jonathan Kornafel, director for Asia at options trader Hudson Capital Energy in Singapore. “Everyone is waiting to see what OPEC does. There are enough things to support the market but nothing to propel it higher.”

Crude oil futures for January delivery rose as much as $1.42, or 3.4 percent, to $43.49 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $43.01 a barrel at 3:37 p.m. Singapore time. Yesterday, futures fell $1.64, or 3.8 percent, to $42.07 a barrel, capping a 23 percent drop since Nov. 26.

OPEC should make a “substantial” output cut when it meets on Dec. 17 in Algeria, Shokri Ghanem, Libya’s top oil official, said on Dec. 8. OPEC agreed on Oct. 24 to cut daily output by 1.5 million barrels.

Obama’s Plan

OPEC will “work it back up to $100,” Pickens said in an interview in New York. “It will all be determined by the global economy. If you get a recovery in the global economy, you will get it back up.”

U.S. President-elect Barack Obama proposed on Dec. 7 an economic stimulus plan based on infrastructure development to help lift the country out of its worst recession since World War II. Australia will start making one-time payments to families and pensioners under a A$10.4 billion grant program and China may cut personal income tax.

OPEC’s agreed 1.5 million barrel-a-day cut would be larger than a forecast drop in demand by the U.S. Energy Department. Global oil consumption will average 85.75 million barrels a day in 2008, down 50,000 barrels from 2007, the department said in its Short-Term Energy Outlook yesterday.

Global demand fell every year from 1980 to 1983, according to the department, the last time there was a yearly consumption drop. Oil usage will decline an additional 450,000 barrels a day next year to 85.3 million barrels a day, the department said.

2009 Forecasts

The International Energy Agency and OPEC have lowered demand forecasts in the past month because of the economic contraction.

The IEA reduced its 2009 estimate by 670,000 barrels a day, or 0.8 percent, to 86.5 million barrels a day in a Nov. 13 report. The Organization of Petroleum Exporting Countries cut its forecast for next year by 530,000 barrels a day, or 0.6 percent, to 86.68 million barrels a day, in its monthly oil market report on Nov. 17.

Traders are betting that oil for January delivery may fall below $42 a barrel, according to data on put options contract volume from the New York Mercantile Exchange. Crude may decline to $25 a barrel next year as demand drops on the economic contraction, Merrill Lynch & Co. said last week.

Crude oil jumped 9.5 percent, the biggest gain in five weeks, after the Saudi Arabian oil minister said he had delivered the output cuts promised to OPEC, a sign that world supplies are smaller than traders had estimated.

Ali al-Naimi, the Saudi minister, said in an interview in Poznan, Poland, that the kingdom pumped 8.493 million barrels of oil a day in November, close to its OPEC production quota of 8.477 million barrels a day. That’s 287,000 barrels a day less than estimated by the International Energy Agency.

“It’s quite unusual for the Saudis to make this kind of statement, and it should give confidence that they are following through with the cuts,” said Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $5 billion energy-company bond portfolio. “This may encourage others to behave similarly to end the free-fall in prices.”

Crude oil for January delivery rose $4.15 to $47.67 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures are heading for the biggest gain since Nov. 4. Oil is up 17 percent so far this week, the largest one-week gain since June 1998, when OPEC slashed output by more than 3.1 million barrels a day.

Saudi Arabia’s oil production was “absolutely” in line with its OPEC quota, al-Naimi said today in an interview in Poznan, where he is attending climate-protection talks. He declined to comment further on OPEC policy.

“The Saudis might have been impatient with the market’s skepticism, so they’ve decided some transparency is needed,” said Mike Wittner, head of oil market research at Societe Generale SA in London. “It shows they’re deadly serious about cutting already and serious about cutting more.”

Further Reduction

OPEC’s previous oil-supply cuts aren’t enough, and the group will need to make a “substantial” additional reduction at its next meeting, on Dec. 17 in Oran, Algeria, Shokri Ghanem, Libya’s top oil official, said in a Bloomberg TV interview today.

“The Oran meeting will decide a severe production cut to stabilize the oil market,” OPEC President Chakib Khelil, who is also Algeria’s oil minister, said in an interview on state radio today. “There is a consensus to reduce production.”

Oil has tumbled 25 percent since the Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world’s oil, announced a 1.5 million-barrel-a-day output cut on Oct. 24 in Vienna. Prices fell as fuel demand slumped and speculation grew that some members weren’t complying with their agreed-on quotas.

“The OPEC heavyweights are all serious about getting prices higher, so they will make the cuts,” said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts.

Russia’s Option

Russian President Dmitry Medvedev said his country, the second-biggest oil producer, may join OPEC and reduce output to support prices, RIA Novosti reported from Kurgan, Russia.

Futures, which have dropped 53 percent this year, are heading for the biggest annual decline since trading began in 1983, as global economies falter.

Oil for delivery in December 2009 traded at a $13.11 premium to January futures, down from a $14.27 premium on Dec. 8. The shrinking spread may indicate that storage space for oil is scarce and that the crude is being sold on the spot market, said Stephen Schork, president of the Schork Group, an energy markets analysis company in Philadelphia.

This price structure, when the subsequent month’s price is higher than the one before it, is known as a contango.

“You are starting to see a shift in the curve,” Schork said. “You are starting to see a return of demand to the front of the board.”

Inventories Climb

Contango trading encourages companies to increase stockpiles. U.S. crude-oil supplies rose in 10 of the past 11 weeks, according to the Energy Department.

“The weaker dollar and the likelihood of a significant OPEC cut is sending the market higher,” said Peter Beutel, president Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “These are the strongest reasons we’ve seen for a rally since prices started to slide in July.”

The Paris-based IEA, an adviser to 28 nations, said global oil demand will contract this year for the first time since 1983 and reduced its outlook for 2009.

Consumption worldwide will shrink in 2008 by 200,000 barrels a day, or 0.2 percent, the IEA said in a monthly report today. The reduction in demand is concentrated in developed economies in the Organization for Economic Cooperation and Development, where oil use will tumble 3.3 percent. Next year’s growth may be wiped out if the economic slump deepens, the agency said.

OPEC, supplier of more than 40 percent of the world’s oil, agreed to cut production quotas by a larger- than-expected 9 percent to revive prices as a global recession reduces demand for crude.

The Organization of Petroleum Exporting Countries set a quota for 11 of its members of 24.845 million barrels a day, starting Jan. 1, compared with its current target of 27.308 million barrels a day, OPEC President Chakib Khelil said. The record 2.46 million barrel-a-day cut is larger than a 2 million-barrel drop indicated yesterday by Saudi Arabian Oil Minister Ali al-Naimi.

“OPEC is sending a message that they are trying to cut pretty seriously,” said Mike Wittner, head of oil research at Societe Generale SA in London. “If they need more cuts, there will be more cuts.”

Crude oil fell as low as $39.88 a barrel in New York, the lowest since July 2004, on skepticism OPEC will adhere to its new agreement and after a government report showed rising U.S. crude stockpiles. Oil’s $100-a-barrel collapse from July’s record has curbed revenue for producers, threatening government budget shortfalls. Saudi Arabia’s King Abdullah said last month that producers need crude at $75 to spur investment in new fields.

Russia, the biggest oil exporter outside of OPEC, today pledged to curb exports too, as it did a decade ago when oil sank toward $10 a barrel.

‘Dramatically Low’

“If OPEC would not do what it has to do given demand destruction, the price could stay at a level that is really dramatically low,” Venezuelan Oil Minister Rafael Ramirez said after today’s meeting.

OPEC announced the new quota by saying the group had agreed to reduce output by 4.2 million barrels a day from September’s actual production level of 29.045 million barrels a day for the same 11 nations. That measure of actual production came from an average of analyst and news agency estimates compiled by OPEC’s Vienna-based secretariat.

To be sure, OPEC often pumps more than its quotas permit. Last month, the 11 nations, excluding Iraq and Indonesia, pumped 629,000 barrels a day more than the ceiling, according to OPEC’s monthly report. U.S. Energy Information Administration acting head Howard Gruenspecht said compliance with cutbacks will be “critical” in determining how oil markets will react.

Today’s decision is OPEC’s biggest ever reduction in quotas, exceeding a 1.9 million-barrel, 8.3 percent cut agreed in March 2000, when Iran was temporarily excluded from the ceiling. The new quota will be 2.2 million barrels a day lower than OPEC’s December production, Khelil said.

Russian Help

Russia may cut exports by 320,000 barrels a day next year if prices remain weak, after reducing daily exports by 350,000 barrels last month, Russian Deputy Prime Minister Igor Sechin said earlier today in Oran.

Other non-OPEC producers, including Kazakhstan, may trim supply as well, Sechin said. Azerbaijan may lower production as much as 300,000 barrels a day, Azeri Energy Minister Natig Aliyev said in Oran. Mexico’s energy ministry spokesman Hector Escalante yesterday declined to say whether it will aid OPEC cuts while Norway has said it has no plans to lower production.

Forecasts for oil consumption have shrunk during the past few months as the global recession weighs on consumers and industries. The International Energy Agency says global oil demand will contract this year for the first time since 1983.

In the U.S., oil consumption will be almost flat through 2030, as the use of biofuels, rising prices and new car efficiency standards temper demand, the Energy Information Administration, part of the U.S. Energy Department, said in a statement today.

London Summit

“The fall in oil prices in recent months has benefited the economy at a difficult time and helped hard-pressed consumers,” U.K. Energy Minister Mike O’Brien said in a statement after OPEC’s announcement. The U.K. will host a summit of energy ministers, including Saudi’s al-Naimi, in London in two days time.

Falling oil prices may delay or halt investment in exploration and production projects, setting up a possible “supply crunch” in future years, IEA Chief Economist Fatih Birol said on Dec. 10. Cheaper fossil fuels may also deter efforts to develop wind, solar and other alternative energy sources.

Oslo-based StatoilHydro ASA and Royal Dutch Shell Plc of The Hague postponed investments in Canada’s oil sands this year after tumbling prices reduced potential profits.

Saudi Arabia’s Manifa oil field will start in 2011 only if consumers require the extra crude, al-Naimi said in an interview today. “When we need it, it will be there,” he said, adding that the start of the field depends on the “market situation.”

OPEC will next meet on March 15 in Vienna and chose Angolan Oil Minister Jose Maris Botelho de Vasconcelos as its president for 2009.

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